The Ultimate Guide to Customer Loyalty In E-Commerce
Welcome to the next blog in Splitit’s series of “Ultimate Guides” to e-commerce success. We’ve covered converting your visitors to shoppers and increasing your Average Order Value when your shoppers make purchases. In this Guide, we take on another huge source of value to your business: e-commerce customer loyalty.
Customer loyalty makes a huge difference in the underlying economics of your business. The lifetime value of a customer can be several multiples of an individual order. It’s referred to by many names, including Customer Lifetime Value (CLV or CLTV), Lifetime Customer Value (LCV), or Lifetime Value (LTV).
Just imagine a simple scenario. If your shopper makes back-to-school purchases every year for 12 years, and you keep them coming back to spend $150 each year, their lifetime value is $1,800. That’s six times greater than persuading them to make a one-off $300 purchase. In fact, research suggests that a 5% increase in customer retention increases profits as much as 95%.
In addition to revenue, you also should examine CLV in the context of acquisition costs. The industry-standard metric is that it costs five times as much to acquire a new customer as to retain an existing customer.
We’ll get more into the details of the numbers of customer loyalty below. We’ll also cover what you can do to optimize the cycle from new customers to loyal customers, and then cover nine strategies successful e-commerce retailers use to build brand loyalty and grow their repeat customer base.
By now, you should already be convinced that using even a few of these strategies can have a big payoff for the financial health of your business.
As you navigate through this Ultimate Guide to Customer Loyalty In E-Commerce, feel free to jump to the sections that pertain most to your business. You can also access special tools to score your own loyalty efforts and get an insider view of loyalty data from Splitit — don’t miss them! Access our Loyalty Toolbox to download them.
- Customer Loyalty by the Numbers
- Measuring Loyalty Using NPS
- Understanding Lifetime Customer Value
- Master the Post-Conversion Lifecycle
- Best Boosts to Your Customer Loyalty Metrics
- Empathetic Design
- Digital Clienteling with Email Marketing
- Site Personalization
- Creating Community
- Referral Programs
- Points Programs
- Selling with Integrity
- Customer Service
- Making Paying Easy
- Brief recap
- Contact Splitit for more
- Appendix: A Deeper Look at Lifetime Customer Value
1. Customer Loyalty by the Numbers
Measuring Loyalty Using NPS
Loyalty sounds like it should be an emotional concept. It’s soft and fuzzy, so how could you possibly measure it? Well, of course, clever experts have found a way. One of the best-regarded industry metrics for loyalty is the Net Promoter Score, or NPS.
There’s a huge body of literature behind this metric, so we’ve broken it down for you. If you want to learn more about it, we recommend the Net Promoter website.
You’ve undoubtedly encountered this question many times. Respondents answer on a scale from 0 – 10. This creates three groups:
- 9s and 10s. These “promoters” have the highest loyalty. They are likely to keep buying and even refer others.
- 7s and 8s. These “passives” are satisfied enough, but not enthusiastic customers. You could easily lose them to a competitor.
- 6s and below. These “detractors” are unhappy customers. They are unlikely to buy again. They may even damage your brand through negative word-of-mouth, especially at the lower end of the range.
With these three groups in mind, your formula is:
% of Promoters – % of Detractors
NPS ranges from -100 (if every customer is a detractor) to 100 (if every customer is a promoter).
The industry benchmark for e-commerce NPS is 45. That means most shoppers are relatively happy. If you’re near or above that benchmark, keep going! You always want to be better than your nearest competitors to capture more spending and more lifetime value in your category. If you’re below that benchmark, yes, you have some work to do, but at least you’ve identified the root of the problem.
What you should take away from NPS is this:
- It’s an easy question to ask at nearly every customer touchpoint. You only ask one question, rather than cumbersome shopper surveys.
- Where you are headed matters more than where you are. Put yourself on the path of continuous improvement.
- NPS doesn’t actually measure Lifetime Customer Value, but it’s believed to be an excellent predictor.
Understanding Lifetime Customer Value
Lifetime Customer Value (CLV) is a forecast of the total value of a customer relationship from the customer’s first to last order. Measuring it in retrospect for an individual customer is an easy task, simply totaling the sales per customer. Predicting it poses additional challenges.
Here’s a step-by-step process for calculating CLV to find the lifetime value of your average shopper:
- What’s the average order per customer? In most cases, you should use at least a full year’s worth of data here so that you can smooth over seasonal differences. Let’s call this AO.
- What’s the average frequency of customer purchases over a given period of time? Again, using a year as your interval helps keep your numbers cleaner. You may need to use a longer interval if you sell items with a longer life cycle, such as fitness equipment or mattresses. We’ll call this AF.
- Finally, what’s the average lifespan of a customer? If you have been in business for a long time, you may be able to calculate this with your actual data. If not, you may need to find third-party research, or failing that, start with a hypothesis that you can test and refine over time. We’ll call this AL.
If you want to keep things simple, just multiply the numbers:
AO x AF x AL
If your Average Order is $75, shoppers shop with you three times a year, and tend to stay loyal for five years, your number is:
$75 x 3 x 5 = $1,125
Readers with an accounting background might challenge this number. What about costs? What about changes over time? There are metrics you can use to refine this number even further, but just using these simple metrics, if you increase your Average Order Value by $15, or 20%, you increase the lifetime value accordingly.
$90 x 3 x 5 = $1,350
If you increase purchases per year to four, you see further benefits.
$90 x 4 x 5 = $1,800
See the Appendix for how to continue calculating true lifetime value. This Appendix includes detail on how to factor in costs, customer retention rates, and even inflation.
What we want you to take away from this is the following:
- As with NPS, where you are headed matters more than where you are. Don’t sweat the numbers. Put yourself on the path of continuous improvement.
- You have four factors you can use to increase CLV: Average Order, Number of Purchases Per Year, Length of Customer Relationship, and Customer Retention Rate.
2. Master the Post-Conversion Lifecycle
Retailers are likely very familiar with the marketing funnel, which is a metaphor for describing how shoppers go from awareness to purchase decisions. Our focus in this blog is retention, however, so we’re focusing on the post-purchase lifecycle for existing customers as well.
Satisfaction: Satisfaction refers to the customer’s feelings after a specific purchase. Did they receive what they ordered, on time, without issue? Was the item what they expected? Did the payment process go smoothly and eliminate any unpleasant surprises such as fees or interest charges? If any issues occurred, did customer service resolve them to the satisfaction of the customer? If an item needed to be returned, was it easy and fair? With new customers, you only have one chance to make a first impression. These create the baseline customer experience.
Repeat Visits: Repeat visits give you a great signal about the level of satisfaction from prior purchases. The more often your shopper comes back, the more likely it is that you delivered customer satisfaction on a previous purchase, and vice versa. As we discuss below, you increase your numbers here by using email marketing and social media as a tool for clienteling, or cultivating long-term relationships.
Brand Loyalty: Brand loyalty takes repeat visits to the next level. To increase the overall value of a customer relationship, you want existing customers to come back to you every time they make a purchase within the categories that you offer, or at minimum, have a strong preference for your brand. Read on for techniques about creating this enduring preferential relationship using programs such as rewards programs or points.
Brand Advocacy: Brand advocacy is the final piece of the puzzle. The survey question you use when measuring your NPS asks people whether they would recommend your brand. In part, recommendations illustrate the degree of loyalty. Promoters are willing to go out of their way to take action on your behalf. It’s easy to understand why advocacy makes for even more valuable customers. If your customer brings you three more customers, you lower your acquisition costs and effectively get four customers’ worth of lifetime value from a single shopper.
3. Best Boosts to Your Customer Loyalty Metrics
The world-class design firm IDEO has championed empathetic design. “Without the understanding of what others see, feel, and experience, design is a pointless task,” according to IDEO.
In the world of ecommerce customer loyalty, you can do this by imagining your site visitors in terms of personas. Personas help you understand your users as real-world people who want to achieve a certain outcome, rather than as just operators of your website or as people who order and pay. You’re not just making up fictional characters, however. Design personas come from your actual data about shoppers from their buying behavior and survey responses.
Offering useful product information and an easy purchase experience is just the beginning. By adding value and tapping into the shopper’s intentions and emotional needs, you give them additional reasons to choose your store as their preferred method for making purchases of the types of products you offer.
Email marketing may be the most cost-effective and useful tool in your box, with social media right behind it in terms of impact on loyalty. When done thoughtfully and correctly, you can create tailor-made opportunities for each one of your shoppers. Email helps you cultivate them as repeat shoppers, also known as your clientele.
You likely have troves of information, not only of past purchases and/or returns but of product views, comparisons made, searches, time of day visitors browsed, type of device, etc. This can all be used to segment and then personalize marketing messaging and offers to specific shoppers. You already have the data – use it for your shoppers’ benefit.
Use your segmented data to personalize shopper experiences – from marketing emails to landing page content. This approach helps you cultivate a marketing relationship rather than a series of disconnected emails. It enables you to meet your customers where they are:
Imagine that you just received an email detailing promotions on sandals (as summer approaches) from your favorite brand of shoes. The email was fun. It spoke to your wanderlust and love of summer (very powerful when sitting at a computer desk).
Now imagine that you clicked on the link. Even with the promotion, the shoes were still expensive. You browsed, looked at different styles in different colors. Eventually, you moved on and got back to work. A few hours later, you receive another email, with a reminder that the shoes were in your shopping cart and offering an additional promotion. You buy the sandals and feel good about it.
When retailers target shoppers specifically and personally, they are more likely to become loyal customers. They feel like the brand has taken the effort to create shopping experiences specifically for their needs. Personalization is the new loyalty program.
A Motista survey from 2016-2018 looked at more than 100,000 shoppers of more than 100 retailers across many sectors. They found that shoppers who emotionally connect with a brand or retailer will spend twice as much as customers who rate themselves as merely “satisfied” with that brand. These emotionally connected shoppers are the holy grail for retailers. They stay with a brand for an average of 5.1 years, as opposed to 3.4 years, will recommend that brand 71% of the time, rather than 45%, and have a 306% higher lifetime value (LTV).
The urge to belong is one of the most basic human desires. We want to be part of something larger than ourselves, especially if that something is cool.
A community is more than a social media profile or a robust following on Instagram (although these are good too). It’s an organized space that encourages brand to customer, customer to brand, and most importantly, customer to customer interaction.
In this space, customers become more than mere shoppers who make transactions – they become brand ambassadors and advocates representing a lifestyle as much as a product. Being a part of something bigger, centered around your brand, keeps them coming back to you again and again.
If your community can become a go-to source for information about the lifestyle or activity you are promoting – your brand, and therefore your business, will win big-time. You also make it more costly to switch to a competitor, because they also need to abandon a community when choosing a competitor’s product.
Happy, satisfied, repeat customers can be your most influential marketing allies. The Word of Mouth Marketing Association (WOMMA) estimates that every day in the United States alone, there are more than 2.4 billion brand related conversations.
A WOMMA study also found that 64% of marketing executives believe that word of mouth is the most effective form of advertising, yet only 6% have mastered it. We think it’s time for you to become a master.
Referral programs are a win-win way for you to leverage your shoppers’ power and ability to refer their friends and families. The key is to design the right referral program for your business.
The bottom line with Referral Programs – if you have a great product or service, your customers are very likely already talking about your brand. Formalize this communication and gain loads of additional, loyal customers.
Royalty or Points Programs
While everyone appreciates promotions and exclusive offers, you can’t buy customer loyalty. You can, however, encourage engagement that leads to greater participation with your brand.
The rewards themselves don’t need to be huge financial incentives. They do, however, need to be in line with your brand and the lifestyle your customers espouse. They can also make customers feel important by providing them with exclusive content and offers.
A Neilsen survey found that 84% of shoppers will choose brands that have loyalty programs over those that do not. Conversely, If a brand doesn’t have a loyalty program, 68% of millennials say they will not be devoted to that brand. Your imagination is the only limit on how to structure a VIP or loyalty program.
Selling with Integrity
Most retail businesses are set up to go beyond a single sale per customer as the ultimate goal. Repeat, loyal customers will serve your business better than one-offs. The first and arguably most important way to ensure your business embodies this mindset is to understand that selling is a mutual exchange in value. You’re not trying to sucker a shopper into buying a shoddy product. You’re satisfying a need and the interaction is reciprocally beneficial.
We encourage you to look at each transaction with a shopper as a first date, not only the first transaction. Your brand needs to make a great impression – every single time. When you sell a product you believe in and consumers can trust; you’re setting an expectation. If you leave your customers with a good feeling over and over again, that is something they’ll remember. It will become a habit. It will also incline them to forgive a bad experience as “out of the ordinary.”
Your interaction with your shoppers says it all. 80% of shoppers will pay more for a product if they receive excellent customer service. It is that important.
Some retailers make a very common mistake of considering customer service only when something goes wrong. In fact, customer service starts the moment your shopper encounters any kind of friction at all. Questions about products, confirmations of order status, shipping information, and more – all of these add up to a broader service experience, even if the customer never has to call or email you with an issue to resolve.
By making sure customers know you are always there for them, you encourage them to come back to your storefront. It’s no different from brick and mortar shopping. Given a choice, shoppers will return to the store where sales staff took a proactive approach to helping them from the moment they neutered to the moment they leave with a purchase in hand.
4. Make Paying Easy
Perhaps the most obvious (and most overlooked) touchpoint on the journey to building ecommerce customer loyalty is the shopping cart.
Give consumers what they want. Remember, the benefits of a sale go both ways. Your shopper is getting what they need. You are getting paid to facilitate that. Offering a BNPL solution is a natural extension of that relationship by giving shoppers more buying power in the moment.
We’re seeing a major shift away from consumers using BNPL solutions only for large, expensive purchases to one where they use BNPL for everyday items. It is younger shoppers who are driving this trend. In Australia, half all BNPL users are under 35.
With Splitit, in a recent survey we found that 85% of shoppers would return to a store because it offers our installment payments solution. In addition to the ease of paying in installments, Splitit charges no additional fees or interest to the shopper. Hidden or unexpected charges can do enormous damage to your brand, even if they come from your installments provider rather than from you.
Customer loyalty is too important to ignore. Neither can the successful e-commerce business simply trust that their good products will automatically result in loyal customers. The cultivation of ecommerce customer loyalty is an active, ongoing journey where brands must value and truly listen to their customers. The benefits exceed the effort and can be one of the most rewarding measures of your brand’s success.
As you remember, we left CLV as a simple formula. Average Order times Average Number of Sales times Average Lifespan, all; measured in years.
The next step is to factor in costs. You can subtract customer acquisition costs, operating expenses (OPEX) and cost of goods sold (COGS) from your top-line number. This gives you gross margin over the customer lifetime. This number ties more to your bottom line.
Remember our example: If your Average Order is $75, shoppers shop with you three times a year, and tend to stay loyal for five years, your number is:
$75 x 3 x 5 = $1,125
Let’s say total costs are $125 per year, which means $625 for the lifetime of the customer. Your lifetime margin is 44%, or $500. This is LM.
Now, you have to factor in that not all customers stay with you for the full lifespan of an average customer. This is your customer retention rate (RR). We’re going to use 60% for our example.
You also have to consider that a dollar earned today will be worth less than a dollar over time because of inflation. You don’t have to be an economist here. You can just use the industry-standard number of 10% for this figure, called a Discount Rate (DR).
The final formula is:
LM x (RR/1+DR-RR)
The number from our example would be:
$500x(0.6/1+0.1-0.6) = $600
If you’re able to boost your retention rate to 75%, you can have a huge impact on CLV.
$500x(0.75/1+0.1-0.75) = $1,071
In other words, small changes can have big impacts.
Here are a few additional links if you want to dig into the quantitative side of things more deeply:
Bonus: access special tools to score your own loyalty efforts and get an insider view of loyalty data from Splitit: access our Loyalty Toolbox today!